Question 1

An example of an item that is deducted from net income when preparing the operating activities section of the statement of cash using the indirect method is

Accepted Answer

C

Question 2

Outback Corp. recorded sales of $1,300,000 in 2006, in addition the company's accounts receivable balance grew from $120,000 at the beginning of 2006 to $165,000 at the end of 2006. How much cash did Outback collect from customers in 2006?

Accepted Answer

Sales of $1,300,000 represent the total revenue generated from customers. However, the increase in accounts receivable of $45,000 ($165,000 ending balance minus $120,000 beginning balance) indicates that not all of the revenue was collected in cash in 2006. To determine the cash received from customers, we must subtract the increase in accounts receivable from sales:

$1,300,000 - $45,000 = $1,255,000

Therefore, the answer is C.

Question 3

A company in the growth phase of its product life cycle will normally have the following pattern of cash flows

Accepted Answer

During the growth phase of the product life cycle, a company is typically investing heavily in capital expenditures and marketing to increase sales and production capacity. As a result, the cash flows from operations can be either positive or negative, depending on the success of these investments. However, the company will generally have negative cash flows from investing due to the high level of investments required for growth. To fund this growth, the company may need to raise financing through debt or equity, resulting in positive cash flows from financing. Therefore, the typical pattern of cash flows during the growth phase is negative or positive cash flows from operations, negative cash flows from investing, and positive cash flows from financing.

Question 4

When preparing the statement of cash flows using the indirect method an increase in inventories would appear as

Accepted Answer

An increase in inventories represents an outflow of cash since the company spent cash to acquire additional inventory. Therefore, it would be deducted in the operating activities section as a decrease in cash flow.

Question 5

Firms with short operating cycles will experience less of a lag between the creation and delivery of their products and the collection of cash from customers, for this reason

Accepted Answer

Firms with shorter operating cycles will receive payment from customers faster and will be able to convert their inventory into cash more quickly. This means that the difference between their cash flow from operations and their working capital from operations will not be significant. Therefore, their cash flow from operations will not differ much from their working capital from operations.

Question 6

Normally, cash flows from investing activities will start providing cash during which phase of the product life cycle?

Accepted Answer

The answer of Normally, cash flows from investing activities will...

Question 7

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be

Accepted Answer

If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities, it means the firm is tying up more cash in working capital. This leads to a higher cash outflow from operations, resulting in cash flow from operations being less than net income.

Question 8

Normally, cash flows from operations will peak during which phase of the product life cycle?

Accepted Answer

During the maturity phase of the product life cycle, the product has established itself within the market and sales growth has typically stabilized. Additionally, the company has had time to refine their operations and streamline their production processes. As a result, cash flows from operations will typically peak during this phase as the company is able to generate more revenue while keeping costs in check.

Question 9

Normally, cash flows from financing will start using cash during which phase of the product life cycle?

Accepted Answer

The answer of Normally, cash flows from financing will start...

Question 10

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from

Accepted Answer

Proceeds from issuing equity instruments represent financing activities since they represent capital contributed by owners/shareholders.

Question 11

When preparing the statement of cash flows using the indirect method the payment of dividends would appear as

Accepted Answer

Payment of dividends would be considered a use of cash in the financing activities section because it represents a distribution of company profits to shareholders and is therefore a financing decision. It does not affect the company's operating activities directly.

Question 12

Which of the following is the correct formula for calculating cash collections from customers?

Accepted Answer

The answer of Which of the following is the correct...

Question 13

One rationale for the statement of cash flows is to

Accepted Answer

The statement of cash flows is designed to reconcile differences between net income and cash receipts and disbursements. It provides an analysis of how a company generates and uses its cash, allowing investors and analysts to better understand a company's liquidity and financial health. While it does not necessarily ensure that the cash account balances at year-end, it does provide valuable information on changes in cash balances throughout the period. It also does not necessarily calculate the company's free cash flow, though free cash flow can be derived from the statement of cash flows. Finally, while the statement of cash flows does examine the cash effects of income from discontinued operations and extraordinary items, it is not focused specifically on these items or changes in accounting principles.

Question 14

Toro Company recognized $655,000 of cost of goods sold in 2006, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2006. How much cash did Toro spend for inventory in 2006?

Accepted Answer

Toro spent $655,000 on inventory in 2006. This is because the cost of goods sold is equal to the beginning inventory plus purchases minus the ending inventory. In this case, the beginning inventory is $325,000, the cost of goods sold is $655,000, and the ending inventory is $230,000. Therefore, purchases must have been $980,000 ($655,000 + $325,000 - $230,000). However, Toro implemented a just-in-time inventory system, which allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2006. This means that Toro did not actually spend $980,000 on inventory in 2006. Instead, it spent $655,000 on inventory and reduced its inventory by $95,000 ($325,000 - $230,000). Therefore, Toro spent $560,000 ($655,000 - $95,000) on inventory in 2006.

Question 15

Which of the following is not an expense excluded when calculating EBITDA?

Accepted Answer

The answer of Which of the following is not an...

Question 16

When preparing the statement of cash flows using the indirect method the purchase of equipment would appear as

Accepted Answer

The purchase of equipment is a capital expenditure and therefore would appear as a use of cash in the investing activities section of the statement of cash flows, as it represents a cash outflow for the company's investment in long-term assets.

Question 17

When preparing the statement of cash flows using the indirect method an increase in accounts payable would appear as

Accepted Answer

The answer of When preparing the statement of cash flows...

Question 18

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?

Accepted Answer

Sale or repurchase of capital stock is not a reason why net income differs from cash flows from operations under the indirect method. The indirect method calculates cash flows from operations by starting with net income and adjusting for non-cash items, changes in working capital accounts, and gains and losses related to the sale of plant, property, and equipment. The sale or repurchase of capital stock would be reflected in the financing section of the statement of cash flows.

Question 19

Free cash flows to all debt and common equity shareholders represents the excess of cash flows from

Accepted Answer

Free cash flow to all debt and common equity shareholders represents the excess of cash flows generated from operating activities over cash flows used for investing activities, which are necessary to maintain and grow the business. Financing activities, such as issuing or repurchasing debt or equity, do not factor into this calculation. Therefore, option D is the correct choice.

Question 20

Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method

Accepted Answer

The answer of Which of the following is an adjustment...

Quiz 3: Income Flows Versus Cash Flows: Key Relationships in the Dynamics of a Business